Rules to make offshoring a success

The process of offshoring a business takes a lot of careful planning and can sometimes take a year or more to move into the implementation phase. Global business process outsourcing company WNS lists 8 simple rules in order to make offshoring a success:

1.) Ensure that BPO is the CEO priority - Sponsorship of an initiative that is as critical as BPO must come from the very top. If there is no other option to keep the business afloat, the CEO must be the one to deliver such a message in order for it to be taken as seriously as it should.

2.) Approach outsourcing with an open mind - There are a lot of myths and generalizations that are made regarding the outsourcing industry. Businesses should be open-minded to the possibilities that outsourcing holds and that it extends way beyond just call center work.

3.) Keep it simple - Do not make the transition of sending work offshore a time for making radical changes to your business processes. Offshoring should instead be simply about cost reduction without compromising quality.

4.) Move fast - BPO will not achieve the results desired if it is not seen by the company as critical. Companies can encourage timely results by implementing aggressive timelines across the board.

5.) Empower an internal outsourcing czar, and put top talent on the case - The czar here is referred to someone at the center of the organization who is fully committed and accountable to the success of the transition. WNS states that “survival programs are always led from the top and the center”.

6.) Develop a realistic deployment plan - As crude as it sounds, sometimes being slow and steady wins the race. The offshoring deal must be well-measured and meet objectives without being disruptive to the business. Companies need to be wary of buying into unrealistic transitions in the midst of hurrying to cut costs.

7.) Insist on alignment - It is critical to partner with an offshoring provider that is willing to align its strategies with the client rather than impose its way of working. This means understanding the provider’s values, customizing deliverables to meet its needs, and understanding the scope of work.

8.) Debit budgets in advance - When offshoring and outsourcing companies implement a BPO budget into the savings in advance, it leaves managers with no choice but to commit themselves to the cause, or find a new way to cut costs fast.

An Economist's Take on 7 Tips in Outsourcing

Dr. Oliver Williamson, Professor Emeritus of business, economics, and law at the University of California-Berkeley, outlines “7 Tips for Peace, Profit and Productivity”. Although it does not look dissimilar to a lot of lists that we have encountered regarding the outsourcing and offshoring industry in the past, Dr. Williamson did win the Nobel Prize in Economics in 2009. Here is the gist on the seven tips:

1.) Build cooperation into the contract -Williamson believes that the partnership can be much more rewarding if both customer and supplier implement measures to preserve cooperation throughout the deal. Williamson writes that "efficiency gains from trade go back to when our ancestors traded nuts for berries on the edge of the forest, [in] which exchanges were both transparent and simple."

2.) Factor in hidden transaction costs - This is due to the well-known fact that many offshoring projects never cost the same as initially written in the contract. It is therefore essential to figure out the long-term cost beforehand, as difficult as that may be.

3.) Use the contract as a framework, not a weapon - Outsourcing customers who may have been victimized have a tendency to create overly detailed contracts to prevent any possibility of contingency, which is a mistake.

4.) Make end-of-life arrangements early - Many forget that outsourcing and offshoring deals don’t last forever. The proactive approach would be to plan for defection early on and figure out how to mitigate its effects. After all, changes in a business relationship are most assuredly subject to change as the market changes. Contracts, therefore, need an exit management plan that is well-thought out and fair for both sides.

6.) Play nice (but not too nice) - You can gain the upper hand on your supplier, or let the supplier gain the upper hand on you. Either way, you are in for what Williamson refers to as “one-sided muscular contracting” which will only yield short-term gains.

7.) Always leave money on the table - Many are quick to dismiss this strategy as foolish. However, working towards getting the cheapest price can, according to Williamson, cost both parties in the long-run. Leaving money on the table can instead be a “signal of constructive intent to work cooperatively”, which in turn minimizes “concerns over relentlessly calculative strategic behavior”.

A lot of buzz has been created about virtual captives sourcing model (also known as “hybrid captive and “synthetic captive”). For those unfamiliar, a “captive” operation is generally known as a subsidiary company, typically set up offshore to reduce risks and minimize operational costs. The virtual captive model seeks to bridge the world of third party outsourcing with the benefits of a captive operation – but does it succeed?

Benefits of a virtual captive operation

Among the main benefits, and yet, what is strangely argued by some as the main pitfall of virtual captives, is the sharing of responsibility between the client and the third party provider:

“In the virtual captive space, which is one of the hybrid models---one clear issue which has not been resolved in the market, is the division of accountability between a buyer and the supplier. If it is a pure third party contract, supplier will have the mandate not just to deliver the process, but to also make improvements in the process,” comments Everest Group Research Director, H. Karthik.

Karthik may have a point, but this also means that all that must be done in order to remedy this pitfall is to simply establish a clear foundation on the division of accountability prior to the deal – as is done in any outsourcing contract. Among the most popular examples of the model is the seven-year deal Wachovia made with Genpact in 2005. By personally training its staff and ensuring that their offshore employees had a solid grasp of company culture and its standards for excellence, Wachovia was able to minimize retention and help ensure production efficiency. This was possible because of another main selling point of virtual captive models - the level of control that a client company is given in a addition to the responsibility that the third party has over process improvement. Hence, the name “hybrid captive” - because it seeks to combine the best of both worlds. Karthik's argument is valid insofar as the initiative on both sides to define accountability is not taken. Is not the point of wanting to set up a captive operation negated if the added level of control a virtual captive offers goes unutilized?

The pitfalls of IT outsourcing

Contract negotiator Julian Millstein enumerates the five most common reasons why novices in IT outsourcing fail to get it right in the article “The pitfalls of outsourcing” published at computing.co.uk:

Outsourcing is an easy endeavor. There is more to it than just paying a service provider to take on some of your IT processes. Time and effort are needed in order to have a better understanding of how the entire outsourcing process works, what to do in case security concerns come up, and how it affects your overall operations.

The outsourcing provider will fix everything. It's wrong to say that the service provider will fix your “mess” without affecting or having to change how you do business. As Millstein points out, “... although they [IT outsourcing providers] are generally better at the given function than you are, the way they solve your particular problem, the solution they bring to the table, will by its very nature change the way you do business.”

The buyer fails to provide a baseline. Performance metrics must be established during the contract negotiation. Providing a baseline will enable you to accurately measure or review performance.

The only reason to outsource is to save money. While cost reduction remains to be the top reason why companies opt to outsource, problems may still arise even if you're satisfied with cost savings. What you think you have saved now may mean nothing after several years as salaries increase and turnover takes a toll on the outsourcing process.

It's easy to manage the outsourcing relationship. Outsourcing means, in its simplest form, transferring business processes to a service provider. However, this does not mean that it is a one-way street - the buyer transfers tasks to another company to reduce costs as the latter does the work. It is important to establish a good and efficient relationship so both parties will reap the benefits of outsourcing.

To increase your chances of achieving a successful IT outsourcing deal, avoid these pitfalls and seek advice from those who have extensive knowledge and experience about the process.